No one knows what 2021 holds in terms of health and the economy. But, there is one thing we all can agree on, that it has finally caused GameStop to have a moment of relief.
Since the new year rolled in, the battle between amateur traders(WallStreetBets) and hedge funds(short-sellers), centered-on the GameStop stocks, is becoming wider and more intense. It has turned the markets in the US, Europe, and Asia upside down and has everyone’s eyes on it.
The story is perplexing, but to state it in a few lines, GameStop’s rising shares have stirred tensions among the short seller (hedge funds) who used to profit from its dwindling stocks by short selling.
But, no more after a Reddit group dubbed as WallStreetBets jumped in and pushed the stock price. How they did it? Everything is coming ahead. But, note that this counterattack pressurized the short sellers(hedge funds)to purchase stock despite increasing prices, which they certainly not liked, but had to resist massive losses.
What is GameStop?
GameStop is an American based physical video game retailer. The company operates over 5000 stores across America and specializes in buying, selling, and trading video games and devices. However, for the last few years, digitalization has replaced such physical retailers and put their survival at peril.
In the strong competition with digital video games, GameStop struggled to survive. But the onset of the COVID-19 pandemic feeds to its misery. Due to persistent lockdown, people preferred playing digital video games, and GameStop lost its popularity among the masses; hence started its decline.
But even in this downfall, there were opportunities for short-sellers, who exploited the situation to their best to make some money.
What is short selling?
Short selling involves making profits by borrowing stocks at cheaper rates and selling them at high prices. For example, if a company borrows a stock at $ 250 and sells it at the same rate, its value goes down to 150. After that, the company purchases a stock at 150 to return it to the lender and gain $ 100.
In this way, short-sellers pushed the company’s shares down from $25 in 2017 to$5 in 2020 to profit from its misery. They continued to make profits unless a group of amateur day traders from the WallStreetbets entered the game to make some money and turn their game.
What is WallStreetbets?
WallStreetBets is a Reddit group created to provide its member a forum where they can discuss stock and trading tips. Described as “like 4chan found a Bloomberg Terminal”, the group formed in 2012 could not get much attention initially.
Surprisingly, the community that could not even gather a million-member by the start of this year disrupted the financial market when it announced to buy GameStop stock.
How WallStreetbets increased the GameStop shares?
The group of traders led by a YouTube finance expert” Roaring Kitty,” urged the people to join the community and purchase as much stock as possible. With every passing day, its participants increased exponentially, and on January 27, the community closed its door when members reached four million.
The massive influx increased the GameStop shares by 130 % until the end of January. The soaring shares pressurized the hedge funds to buy stock to cover their bets, causing them to lose huge sums.
According to The Wall Street Journal, Melvin Capital, one of the short-sellers, experienced a 53% loss in January due to rising GameStop shares.
The community became increasingly popular within a few days, and 1 in every 40 Americans started talking about it. Soon after the reopening of WallStreetbets, it managed to get more than 8 million members and is still growing. According to the community’s moderators:
“We have got so many comments and submissions that we can’t possibly even read them all, let alone act on them.”
WallStreetbets also gain support from politicians and firm holders:
The sudden financial disruption also attracted the attention of White House Spokeswoman Jen Psaki. She said that the White House economic team is also keeping a close eye on the ongoing market situation.
Meanwhile, Tesla founder Elon Musk proved to be a market mover whose tweets caused a massive surge in GameStop shares. Musk tweeted “Game stock” with a link to WallStreetBets to support the group that prompted about US$4 billion into GameStop.
As WallStreetbets wreaked havoc on short-sellers, they also managed to gain political support. Lawmakers and politicians both from the left and right-wing backed the community against the hedge funds, manipulating the stock market for many years for their gains.
Senator Elizabeth Warren demanded a thorough inspection saying that the hedge funds, private equity firms, and wealthy investors have treated the stock market as a personal casino.
Robinhood decision faced massive public criticism:
However, GameStop shares’ stratospheric rise slowed down when a popular trading app” Robinhood” limited GameStop shares on February 4. Traders were allowed to buy just one share of GameStop instead of five. Robinhood restriction infuriated the app users, and they started giving the app one-star review.
Politicians also raised their voices against halting the people from buying stocks. Rep. Rashida Tlaib called Robinhood’s move “beyond absurd” and called for hearing on “Robinhood market manipulations.” She said that the app protects the hedge funds who used the stock market as a casino for their personal gains.
Rep. AOC also called on Congress to probe the Robinhood app after restricting small investors from purchasing shares. She also indicated to “support a hearing if necessary,” calling the Robinhood decision “unacceptable.”
As a result of criticism, Robinhood reversed its decision and allowed users to purchase GameStop’s stocks. The company’s co-founder, Vlad Tenev, claimed that they did not have enough money, so they had to halt the trading to protect their firm and customers.
A rising stock market is aligned with a growing economy. However, some traders called short-sellers borrow the stocks at lower prices and sell them to pocket the profit, causing the market to decline. When the WallStreetbets noticed that short sellers are continuously depressing some companies’ stocks, they decided to counterattack their tricks. By betting against the companies stock prices, WallStreetbets increased the shares of GameStop, Blackberry and Nokia, etc., which were dwindling due to short selling.
Wall Street bets are all saying Wall Street is bad as if it’s some kind of revelation. Worse still, again, I’m the only one pointing it out. So right away, with that in mind, you know something is off here. When did trying to win the lottery turn into some game-changing move? And now it’s time for the sad newsflash. Wall Street bets is not a game-changing move.
Wall Street bets is a dangerous move. Now, certainly, I’m no angel, and I doubt you are as well. Plus, Wall Street Bets isn’t pretending to be angels, but the optics are just as distorted as a regular day on Wall Street. To put it another way. If Wall Street is a mirage, Wall Street Bets is like trying to put a mirage in front of a mirage.
Suppose you can’t figure out that mind riddle, good. That’s the whole point because there isn’t one answer. The mirages could bleed together, or they could be separate. But either way, it’s all still a mirage. It’s literally anybody’s guess what might happen. Sticking to the spirit of wall street, the little guys will get hurt.
Sure some rich people might bite the bullet. That doesn’t seem like a very worthwhile goal to me. The most important question is, how did we get here? I’m not talking about wall street per se. I’m talking about all the memes and just the way people are communicating with each other. Call me crazy, but our communication seems poor.
Wall Street bets and the reaction to it are all so elementary. Don’t you think that should be the bigger story? How low the dialogue has sunken too, and how few people are there trying to lift people. I’m not trying to turn this into a rant or anything. I think everyone could use improvements in their communicating, even myself.
All of this is just a smart word of caution about Wall Street Bets. I think you are all big boys and girls who can make their own decisions. So you should feel free to gamble all you want. I’m not trying to be anyone’s life coach; I laugh at the very idea. Think of this more as a real talk session
To be continued